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Functional Partnerships for Supply Chain Due Diligence

7/25/2018

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For the past eight years, much of my work has been centered on supporting initiatives that promote OECD’s due diligence frameworks and guidance for two commodities—minerals and cotton. These initiatives, Responsible Minerals Initiative (RMI) and YESS: Yarn Ethically & Sustainably Sourced (YESS), have developed standards and supporting tools and trainings to help initial processors—smelters and spinners, respectively—conduct due diligence to ensure the material they source does not involve or contribute to specific human rights abuses at the raw material stage of the supply chain (e.g. mine or farm).

Initial processors are the last point in those supply chains where the raw material can be traced back to its origin. Once smelters and spinners combine and process raw material from various mines or cotton farms,[1] these processors render their products untraceable back to the origin of the raw material, which is why focusing on the last traceable point for suppliers and regions makes sense.

One of the many talents these initial processors possess is the ability to convert their raw materials into products that meet the specifications of their customers (and ultimately the end buyers (e.g. global brands)). In fact, they excel at doing what their customers mandate—including implementing responsible sourcing requirements—if they are motivated to do so. This desire to please the customer can require the smelter or spinner to drive requirements further up the supply chain, affecting multiple suppliers who would otherwise be unreachable by brands or end buyers.

The initial processors have a different talent—and fulfill a separate role—than the brands or end buyers do in these supply chains. Brands contribute to the sector by creating a global market for the raw material as well as various intermediaries and products. Brands can also establish requirements, including ethical or environmental parameters, which suppliers and sub-suppliers must meet.

I feel we should acknowledge each supply chain actor’s talents—and limitations—in order to develop a partnership to affect large-scale change all along the supply chain, including at the elusive raw material stage.
One of the limitations that many of the initial processors face is the lack of in-house expertise on evaluating or determining when ethical wrongdoings occur. This step requires an evaluation by trained experts—especially at the raw material production stage of the supply chain (e.g. mining or farming), where these issues are complex and very difficult to detect or assess.

Of course we want all supply chain actors—including initial processors—to be aware of risks posed by their supply chain, and to do their part to avoid contributing to human rights abuses or funding other forms of violence. With this said, we should not expect all supply chain actors to become human rights experts or be solely responsible for identifying or assessing human rights abuses at each mine, farm, or wherever the raw material originates. Without a sufficient level of understanding or expertise, the initial processors might not be effective or have the leverage to mitigate any identified risks on their own. This is an instance where effective solutions require support of the entire industry.

Additionally, when each initial processor develops their own set of criteria and thresholds to define a high-risk origin, the result will include multiple definitions and priorities, which runs counter to what most supply chain initiatives try to achieve: one standard for the industry.

Yet, in order to align with OECD recommendations under RMI’s Responsible Minerals Assurance Process (RMAP), individual smelters or refiners are required to develop their own unique procedure to determine which parts of the world are more at risk of funding conflict or involving human rights abuses than others. In other words, individual smelters and refiners must identify conflict affected or high-risk areas (CAHRAs) in their own way.

Throughout this year, I have helped several smelters and refiners that struggle with the RMAP’s new requirement to develop a procedure to identify CAHRAs and, if warranted, commission a human rights assessment of a mine. It is simply not their area of expertise. At the same time, I have noticed that they don’t have trouble implementing additional Know Your Counterparty (KYC) requirements or even incorporating their new CAHRAs identification procedure into their transaction approval process. Implementation is what they do best.

YESS takes a different approach. Working closely with human rights experts, YESS has created one list of high-risk countries, rather than requiring each spinner to develop their own unique set of criteria and procedure for each country from which they source to determine the risk of forced labor in cotton production—the specific human rights abuse that YESS addresses.

The YESS approach allows the spinners to focus on identifying sources of cotton that originate in the listed countries. This is much easier to understand and—most importantly—implement. They can contribute to YESS’s goals of eliminating forced labor in cotton production by conducting due diligence of their suppliers and cotton origin to avoid sourcing from high-risk countries, unless they have assurances that the actual cotton they source originated from a cotton farm (or community) that has been deemed to be free of forced labor by qualified assessors.

Similar to RMAP, YESS requires spinners to implement procedures to validate the sources of all of their cotton, educate their suppliers on the YESS requirements, and assess their suppliers’ risk level through KYC processes. These are important requests to help spread these new expectations down and across global cotton supply chains. YESS has the added benefit of establishing one set of high-risk countries that will be easier to communicate, implement, and scale up across the entire industry.

I recognize the objective of the OECD requirement to hold each supply chain actor responsible for identifying, assessing and mitigating risks, and I applaud OECD for creating one due diligence framework to apply across entire industries. However, I would prefer to see industry initiatives such as RMI or YESS establish one common set of criteria (or identify high-risk origins) with input from qualified experts, and let the processors do what they do best—implement.

[1] Minerals and cotton can undergo some processing prior to being sent to smelters and spinners, respectively, but it would not be mixed with sources from other countries.
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